Monday, July 27, 2009

Regulators in action

Serving us all, with regulatory deeds big and small. A recent sampling:

1)How to create a black market.

In New York City ...

An undercover investigation of street food carts has uncovered massive fraud, with $200 city vending permits fetching as much as $15,000 in a thriving black market, officials said yesterday...

"I can't sugarcoat the fact that we found a black market ...", said Investigations Commissioner Rose Gill Hearn. "It's not a couple of instances." [NY Post]

Why?

A sharp discrepancy in supply and demand was a key factor in facilitating the fraud. There are 15,000 licensed vendors, but only 5,100 food vending permits.

So the city requires vendors to have a license to sell food, and issues 15,000 those, but also requires the same vendors to have a permit to sell food, and issues only 5,100 of those.

Uh ... the result being...

DOI reported that more than 500 permit holders may have illegally peddled them for 10 to 75 times what they paid to desperate vendors who couldn't wait years for their names to be called from the lengthy list....

... scammers [also] pretend to be vendors who have died or left the country. The crooks pay $200 renewal fees for the lucrative permits -- which should have been returned to the city -- in the name of the vendors. And then they either operate the carts themselves or lease the permits for thousands of dollars.

Well, at least the solution to this is obvious enough -- just match the number of permits to the number of licenses. (One might wonder: After they make you get a license to sell, why should they also make you get a permit to sell?)

And after expending due thought on the problem, the city's regulators are on the job ...

The Health Department wants to yank the permits of more than 500 street food vendors after undercover investigators found widespread fraud ... [NY Post]

... punishing the vendors by making the gap between licenses and permits 500 larger. That'll teach 'em! And this problem will never arise ever again.

2)How to show you're still aggressively on the case (if a little late).

From the Securities and Exchange Commission, at taxpayer expense, another case of extraordinary bungling. Or was it?

A federal judge dealt a blow to the Securities and Exchange Commission on Friday when he dismissed its insider trading lawsuit against Mark Cuban, owner of the National Basketball Associationís Dallas Mavericks.

The S.E.C. asserted in a lawsuit in November that Mr. Cuban had sold shares of Mamma.com, a Canadian Internet search company, after receiving confidential information from its chief executive in a telephone call that the company was going to sell additional shares through an equity offering in 2004.

But the S.E.C. failed to prove that Mr. Cuban had made an agreement with the chief executive during the call that he would not sell his own shares, Judge Sidney A. Fitzwater of the Federal District Court in Dallas wrote in a 35-page decision released Friday....

Judge Fitzwater has given the S.E.C. 30 days to file an amended complaint to the court. If it files another complaint, ďthe S.E.C. must allege some facts that were not previously known, i.e., that Cuban somehow became or consented to be a fiduciary to Mamma.com,Ē said Joshua Davis, a Texas trial lawyer... [NY Times]

What happened here basically is that the president of Mamma.com called Cuban, who owned shares in the company, on the phone and told him that the business was short of cash and so was going to sell more shares. Cuban heard "short of cash ... my shares will be diluted", and sold his shares before it happened.

I don't write much about law here because on a hobby blog, frankly, it's more fun to write about what one doesn't know about. And not so much fun to write about work.

But this case turns on a fundamental principle that is worth noting. I.e.:

Marc Cuban was not an "insider" of Mamma.com. The president of Mamma.com was an insider, but that doesn't make everybody he calls on the phone one. If Bill Gates ever calls you on the phone after misdailing your phone number for Steve Ballmer's and starts ranting "The whole company's going to hell, the jig is finally up!", feel free to short Microsoft stock -- his talking to you does not make you a Microsoft insider. To become an insider you have to explicitly agree to be an insider.

There was not a whit of evidence presented in this case that Cuban had agreed to be an insider, a fiduciary of Mamma.com. So it was a dead lock sure thing that the case would be bounced by the judge -- just as it was. Considering the supposed expertise of the lawyers of the SEC, of all agencies, on such matters this sure looks like a truly impressive piece of bungling ... But was it?

The SEC, in addition haplessly missing so much in the financial crash of late last year, also incredibly totally whiffed on the Bernie Madoff $65 billion Ponzi scheme, in spite of being approached by enough whistle blowers on Madoff to staff the refereeing ranks of a junior soccer league.

If you are government agency that has just screwed up sooooooo badly, your reaction of course then is to tell the public and your politician masters, "We're so incompetent that obviously the world will be a better place if you just close us down and fire us all "In these troubled times you need us more than ever, and we are on the job hunting down wrongdoers no matter how famous and powerful they are!"

As for an example, who better to hunt down than a voluble, high public profile dot.com billionaire who's also the outspoken owner of a pro sports team? And if he's in fact not a wrongdoer, even better! That shows how aggressively you are doing your job!

Legal experts said the ruling is a setback for the SEC, which has tried to expand its enforcement of insider-trading laws... [NY Post]

Successful regulators never play defense. If you've totally screwed up the responsibilities you've got, expand them!

3) How to show you're still aggressively on the case (if a little late), II.

Closing on eight years after 9/11, the World Trade Center site is still not cleared as the as the wreck of the Deutsche Bank tower still stands.

In part this is due to the fatal fire that occurred two years ago as the building was being disassembled. Two firemen responding to the call were killed as the result of rampant brazen violations of fire and safety regulations -- fire hose lines were cut off of from water, exit routes blocked, more...

Everyone failed them. The two firefighters killed in last year's inferno at the old Deutsche Bank building died as a result of a perfect storm of neglect and tragic mistakes, the FDNY's internal review of the fatal fire shows ...

The report ... blames the FDNY for not conducting mandatory inspections, the Buildings Department for not issuing a formal permit for demolition and the building's contractor for shoddy work that turned the condemned skyscraper into a death trap...

"It is stunning and disgusting," said Linda Graffagnino (widow of one of the firefighters). "There are so many people responsible who need to stand up and say they made mistakes."

The report also indicated the Buildings Department did not issue a demolition permit ... Instead, "alteration" permits were issued, which may have led to fewer inspections by agency personnel... [etc. etc.]

But let it not be said that the city's safety inspection bureaucracy will ever be distracted from its duty...

The Deutsche Bank demolition project ... was issued a Buildings Department violation after a cigar butt was found at the site near Ground Zero on June 16, department records show. [NY Post]

Aggressively on the job -- and better late than never!

4) How to cause the world's worst recession in 70 years.

Last September 15, the Lehman Brothers investment bank failed and filed the largest bankruptcy case in the history of the U.S. In the opinion of a great many analysts, this triggered the recession the world is experiencing today, as in what was until then a stressful but contained world financial market it set off a chain reaction cascade of calamitous events. (Including triggering the AIG $85 billion bailout two days later.)

Oh, if only the parties had been able to work out a private deal to save Lehman from bankruptcy, as they had for Bear Stearns just a few months previously ... but hey...

Leaders of Wall Streetís biggest commercial and investment banks had crafted a plan to bail out Lehman Brothers Holdings Inc. the weekend before it went bankrupt, only to see the deal die when U.K. regulators blocked a sale to Barclays Plc, according to a book on the Federal Reserveís role in the financial crisis...

This is not a revelation, it was known at the time. As one financial industry blogger put it...

When I arrived in NYC on that Monday, the first thing one senior partner in the firm said to me was, "So, do you think the FSA is the stupidest financial regulator in history, or just the stupidest financial regulator in the world right now?" [Economics of Contempt]

There you have 'em, regulators in action, a sampling of big and small.

During today's troubles we hear the populist call on all sides that more regulation is needed to cure the economy of today's ills, more regulation is needed to make sure problems like today's never arise again.

Maybe it is so, maybe more and better regulations would indeed be helpful.